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Is higher education a waste of time and money?

The generally-accepted view is that higher education is a sound investment for individuals and society. Bryan Caplan, an American economics professor, challenges this view. Using data on the US to underpin his analysis, the issues he raises are relevant to the UK. David Williams looks at the arguments set out in Caplan’s new book, “The Case Against Education” from a higher education perspective.

The reasons why individuals invest in education is explained by signalling. Signalling contrasts with human capital theory which argues that investing in education leads to the accumulation of new knowledge and skills: the individual becomes more productive and is rewarded by higher earnings. Caplan rejects this view. Most of what students learn at college has limited (or no) value to an employer and fails to make them more productive. Most students take jobs which make little use of the knowledge they accumulate at university: “Academic success is a great way to get a good job, but a poor way to learn how to do a good job”.

Qualifications (credentials) signal not just intelligence, but individuals who are conscientious and conform. To secure their qualification a student will have shown resilience in completing their studies, and conformed to various social norms. Seeking new entrants to the workforce, employers select individuals with credentials that signal these characteristics. The root cause of signalling is imperfect information.
Students are engaged in an ‘arms race’. Higher qualifications differentiate students from their peers. The process is one of “credential inflation”. This does not generally lead to higher skills, but redistributes employment in favour of those with the highest credentials.

Caplan does not believe the skill requirements for most jobs have risen significantly in recent years; many workers have more education than they need and some are “overqualified” and under-employed: “The amount of education you need to get a job has risen more than the amount of education you need to do a job.”

Caplan accepts that neither “pure” human capital theory or “pure” signalling fully explains investment in higher education. His best estimate is that signalling accounts for 80% and human capital 20%. The main role of higher education is to certify the quality of labour, and individuals mostly benefit due to signalling.

The ‘sheepskin’ effect, so-called because diploma certificates were once printed on sheepskins, supports the argument for signalling. For a three-year degree it is not the cumulative build-up of knowledge and skills, which leads to a ‘graduate premium’, but completing the final year. What is important is crossing the academic finishing line and gaining the credential. The sheepskin effect applies to all levels of education. If a student drops-out, they are placed with the pool with lower credentials: “If you quit, the signalling model says the market will lump you with the loser and withhold the sheepskin’s reward.”

Completion rates (the ‘completion probability’) in the US are lower than in the UK. Many students would be better-off by not starting a degree. Examining the likelihood of a student dropping out of a course, Caplan selects four representative student categories: ‘Poor’, ‘Fair’, ‘Good’ and ‘Excellent’. Each reflects a level of cognitive ability and typical outcomes. For example, an ‘Excellent’ student is around the 82nd percentile of ability as shown by US General Social Survey (1972-2012) and fits the profile typical of a master’s degree holder. ‘Poor’ students are around the 24th percentile and typically high school drop outs. Academic success is never certain and strongly influenced by academic ability. Largely due to different completion rates, first degrees for Excellent and Good students are a “solid deal”, but the return on investment for Fair (2.3%) and Poor (1%) students is low.

All categories of students who complete a degree programme receive an education premium. However, Caplan argues the premium is not only due to higher education. Correcting for cognitive (30%) and non-cognitive (15%) ability bias reduces the premium enjoyed by graduates over high school graduates to 40%. Further, the actual premium received is influenced by the subject studied. Graduates gain the highest return where subjects map directly to vocational domains. Talking about “the” return on education is misleading; it also depends on what you study. Caplan suggests the intangible benefits of higher education for individuals are typically a small or there is reverse causation.

For public investment and policy, “given the power of signalling, the social case for education is dramatically weaker than the private case.” Societies over-invest in education. Students unlikely to benefit from higher education should be encouraged to enter vocational training.

Individuals should undertake a first degree if they meet the test of being a ‘Good’ or ‘Excellent’ student. Otherwise they are more likely to benefit from vocational education. Caplan suggests research indicates that ability reflects ‘nature’ rather than ‘nurture’ and that forcing some students down an academic pathway is not in their best interests. He argues his “numbers are the most comprehensive” (compared to other similar studies), although accepting some of his assumptions represent a “best guess”. By making his calculations available, Caplan invites others to check his numbers, and model alternative assumptions if they believe these are justified. While many will reject Caplan’s views or prescriptions, his analysis raises important questions. Given the Review of Post-18 Education and Funding in England, Caplan’s analysis is likely to be scrutinised closely.